Axis Bank has to control cost of funds to improve bottomline

Axis Bank reported a 63.2% growth in net profit for the quarter ended December 2008 on growing business and a sharp drop in provisions and contingencies. Bank���s business as measured by the sum of deposits and advances grew by 54.5% year-on-year (Y-o-Y). This was in line with the trend seen in the first half of the financial year 2009.

Net interest margin (NIM) fell by close to 79 basis points (bps) to 3.12% for the December quarter, as term deposits posted a growth of 75%, while deposits ��� current and savings accounts (CASA) ��� grew by just 29%. Term deposits attract higher interest than CASA deposits.

The bank also reduced interest rates after the Reserve Bank of India���s rate cuts. Falling interest rates affect lending rates rather than the borrowing rates. Therefore, it was expected that banks��� NIM could be affected, though the change was substantial and it is extremely crucial for Axis Bank to control its rising cost of deposits.

Other income rose by 50% Y-o-Y on strong momentum in fee income which grew by 56.7% and trading gains.

The amount provided under the head of provisions and contingencies fell by 34% Y-o-Y due to reversals of provisions on corporate and government bonds, amounting to Rs 147 crore boosting its profit growth. In fact, this is the most crucial aspect of the results, where the growth is more on account of drop in provisions than the growth in net interest income, which stood at a mere 24.4% against 70.8% during the six months ended September 2008.

The positive aspect of the third quarter results is that the bank is still posting a very high growth on its loan book. The performance at the operating level is satisfactory. The key concern is the high cost of deposits. The bank has to control its cost of funds, as it may affect its bottomline growth in the coming quarters.

Going forward, the cost of deposit is expected to come down that would ease the pressure on NIM. And if this happens, the bank would continue to post high growth rates in profit as seen in the first nine months of the financial year 2009.